IMF faces whole new kettle of fish in Greece

The International Monetary Fund is back at the peak of its power and relevance. But with Greece it has taken on a novel challenge — helping to repair a sovereign government’s finances with neither a default nor currency devaluation. No bailout in modern history has managed such a feat. It’s hard to believe Greece will be the first.

With 30 billion euros pledged by Greece’s partners, and up to 15 billion more expected from the IMF, this would be a monster package — equivalent to almost 20 percent of Greece’s economic output. Even this may not be enough.

When debt burdens become intolerable, nations typically adopt an “all of the above” approach — forcing haircuts on their creditors and allowing the national currency to sink. Occasionally, nations can choose between the two. Where countries struggled to honor obligations to bond holders (Mexico in 1994, Korea in 1997 and Turkey in 2000) massive legal tender devaluations were necessary. In each of these IMF-brokered workouts local currencies lost close to 60 percent of their value against the dollar.

Rarer still are nations that have restructured while holding on to a cherished currency peg. Panama succeeded in the late 1980s, but only at the cost of an ugly default — which at one point seemed to threaten even repayment of sacrosanct IMF loans.

Sadly for Greece, historians search in vain for a case where a nation has fully repaired its finances while dodging both default and devaluation. Early signs from Latvia — which is attempting this feat — are discouraging. Fiscal restraint has contributed to a nearly 20 percent fall in output while still leaving the deficit at 8 percent of GDP.

On financial grounds alone, it is difficult to see why Greece would buck the historical trend. Prior to its record-breaking default in 2001, Argentina’s public debt was 62 percent of GDP and its deficit was 6.4 percent. Greece’s obligations are almost twice this size, with debt to GDP at 114 percent and a deficit of 12.7 percent. Argentina both defaulted and its currency dropped like a stone.

The ace in Greece’s hand is its membership of the euro zone. The U.S. federal government has hauled several delinquent sub-sovereign entities back from the brink of default — including New York City in 1975 with a $2.3 billion credit line. But it did so with great regrets, on a modest scale (the loan amounted to just about 3 percent of the city’s output) and has let more than 30 municipalities go bust since 1980.

Still, given the scale of assistance in the current package, should it prove insufficient for Greece, it is hard to imagine frugal German taxpayers stumping up more cash. An IMF package may help euro zone leaders plug the gap for a while. But if history is any guide, Greece still remains at risk of a default or a humiliating exit from the euro.